Case Selection

The comparative approach in this study utilizes aspects of both approaches. The four countries under consideration share some common features. The Balkan countries of Bul-

garia, Romania, Albania, and Bosnia share a historical legacy characterized by centuries of Ottoman rule and rich cultural diversity. Following World War II, these countries adopted socialist regimes. However, with the exception of Bulgaria, they maintained a relatively loose relationship with the Soviet empire. Gradually the political regimes of the countries transformed into personal dictatorships. In Albania, Enver Hoxha’s attempts to introduce Marxism-Leninism led the country into a state of isolation. In contrast, Josip Broz Tito installed a relatively open economic regime in the Federal Republic of Yugoslavia (FRY), while similar attempts by Nicolae Ceaucescu to liberalize the econ- omy proved unsuccessful in Romania. By 1989, Todor Shivkov had distinguished himself as the longest-serving communist leader and a steadfast Soviet ally who attempted to turn Bulgaria into a major economic and military regional power within SEE. The au- thoritarian and personalized structure of power established and consolidated during the communist era eventually played an important role in the aftermath of the collapse of the regimes.

Bulgaria, Romania, Albania, and Bosnia have also followed a similar trajectory to- ward democracy and market economy. The main reason for reforms in these countries at the outset of the transition was the crisis of the planned economy system. In the early 1980s, it was common knowledge that the socialist political and economic system had become increasingly ineffective and in need of urgent corrective measures. However, because groups interested in the preservation of the status quo were politically stronger than those advocating reforms, much needed technological changes and economic liberal- ization programs were either postponed or blocked. In all countries under examination, some piece-meal reforms were introduced in the 1980s, but the effect of these measures was negligible.

The lack of reform led to an accumulation of macroeconomic inefficiencies, which found their expression in growing fiscal deficits and severely repressed inflation rates. The resulting systemic crisis strengthened the stance of reformers who called for the implementation of macroeconomic and structural reforms. In the FRY the first reform steps took place as early as 1988. Bulgaria and Romania initiated reforms after the disintegration of the socialist regimes in 1990; Albania followed suite a year later. The break-up of the FRY and the ensuing war postponed reforms in Bosnia until 1996.

These Southeast European countries also displayed notable differences at the begin- ning of the transition process. Compared to its neighbors, the political regime in the former FRY was relatively open and independent from the Soviet Union. The federal constituencies enjoyed considerable autonomy, which encouraged a slight degree of po- litical debate within the country. However, while these countries did experience some political openness, it was not enough to prevent the disintegration of the federal state in 1990. The antagonistic forces at work in Bosnia plunged the country into a bloody civil war. At the beginning of the transition process the country was placed under a de facto EU protectorate, and the international community increasingly assumed the role of a social planner. In contrast, strong central governments in Albania, Bulgaria, and Romania hindered the emergence of dissident political groups during the communist era. Accordingly, there were no important opposition parties in these countries at the

beginning of the transition. In all three countries, the majority of the former communist elite were able to reintegrate into political and/or economic life.

Table 2.1: Living Standards at the Beginning of Transition

Bulgaria Romania Albania BiH

1990 1990 1991 1996

Population

Population (in millions) 8.718 23.207 3.293 3.401

Rural population 33.6 45.7 63.1 58.5

Living Standard

GDPPC (in const. 2000 US$) 1’720.3 1’895.5 708.3 873.5

Life expectancy (years) 71.6 69.7 71.9 72.1

Under 5 IMR (per 1’000) 18.7 35.7 44.5 12.9a

Fertility rate (births/woman) 1.8 1.8 2.8 1.7

Literacy rate 98.2b 96.7d 98.7b 96.6c Inequality Gini 30.8d 25.5d 29.1e 35.8f Poverty PH1 2g 2g 2e .. PH2 2 2g _11.3e ₂g

Notes: Indicators are in percent, unless otherwise indicated. IMR is the infant mortality rate; GDPPC lists the per capita income levels by PPP in constant 2000 dollars; PH1 is the poverty headcount ratio at US$ 1 a day (PPP) in percent of the population; PH2 is the poverty headcount ratio at US$ 2 a day (PPP) in percent of the population; Gini is the Gini index; a data for 1998; b data for 2001; c data for 2000; d data for 1992; e data for 1997;

g data for 1989; h data for 2002.

Sources: World Bank, World Development Indicators, 2008; European Bank for Reconstruc- tion and Development (EBRD), Transition Report, 2008.

Significant differences also existed in the economic structure and the living stan- dards across countries. Tables 2.1 and 2.2 provide some summary economic and social indicators at the beginning of the transition.3

With the exception of Romania, all countries were small in demographic terms. A large fraction of the population lived in rural areas. In Albania and Bosnia, the majority of people lived in the countryside. Both countries had low levels of income, with GDP per capita of US$ 708.3 and US$ 873.5, respectively. Income levels in Romania and Bulgaria were slightly higher, placing them in the group of lower middle-income countries.

Life expectancy and literacy rates were similar to those of Western industrial coun- tries, reflecting the positive legacy of socialist rule. However, the relatively high rates of

3

The tables point to a general methodological problem, namely the scope and quality of the data. The problem is most severe at the beginning of transition, mainly because of measurement errors and underreporting. In later years, the data improved; consequently it can be considered more reliable. Data issues have been discussed in detail in EBRD (1999, 2000); Falcetti et al. (2002, 2006) and Rusinova (2007).

data for 2005; f

infant mortality point to the states’ limited capacity in providing health services to the entire population. The rural population was most neglected in this respect. The rates of income inequality and poverty were low in all countries when compared to developing countries, but in comparison to European standards, poverty rates were high, especially in Albania.

Table 2.2: Economic Indicators at the Beginning of Transition

Bulgaria Romania Albania BiH

1990 1990 1991 1996

Macroeconomy

GDP (const 2000 US$, billion) 14.997 43.99 2.332 2.971

Current account/GDP −8.2 −9.6 −29.1a ₋₂₄

External debt/GDP 48.2 16.5b 66 116.4

External debt/exports 143.9 64.9b 498.1a 550.2

Share of trade in GDP 65.3 39.2 95.3b 71.3

Economic Structure

Private sector share in GDP 10 15 5 35c

Share of industry in GDP 39.8d 49.9 32.1 21.4

Share of agriculture in GDP 15.4d 23.7 42.5 20.5

Labor Force and Employment

Labor force (percent of population) 75 69.1 74.7 71.9

Employment in agriculture 18.5 29.1 67.2e ..

Employment in industry 44.2 43.5 11e ..

Private sector employment 5.9 34d 1.8 ..

Notes: Indicators are in percent, unless otherwise indicated. a data for 1993; b data for 1992; c data for 1998; d data for 1991; e data for 1994.

Sources: World Bank, World Development Indicators, 2008; EBRD, Transition Report, 2008.

There was also considerable variance in the economic structure of the four country cases. Albania and Bosnia had very low levels of GDP at the outset of the transition process. In the case of Bosnia, the level of GDP was estimated to be at 20 percent of its pre-war level in 1991 (IMF, 2000a; World Bank, 2004b). The relatively large current account deficits in Albania and Bosnia can be attributed primarily to the discrepancies between exports and imports. In both countries, the reconstruction efforts of that time can explain the overhang of imports. Since the industrial park of these countries was either depleted or destroyed, goods and services had to be brought in from abroad. Both countries were thus highly dependent on external markets. This outside dependency led to a rapid increase in foreign debt.

In Bulgaria and Romania, trade and current account balances were less distorted. Especially in the case of Romania, the low levels of imports and exports respective to GDP indicate that industrial production was directed primarily toward the internal market. Simply put, the goods and services produced were not competitive in external markets. Following Gorbachev’s perestroika during the mid-1980s, Bulgaria experienced

a low level of trade with respect to GDP due to the loss of the country’s preferential access to the Soviet market. Hence, both countries were in a phase in which they had to reconsider their trade strategies. Compared to Albania and Bosnia, Bulgaria and Romania had relatively low levels of external debt. During the 1980s, Romania made Herculean efforts to pay off international lenders, which in turn rendered her incapable of modernizing her depreciated industrial assets.

All countries had relatively low levels of private sector share, except for Bosnia, where forms of small private enterprises existed on a larger scale. Private employment was moderate in all countries. What remains noteworthy is the size of the agricultural sector in these economies. In Albania, a large share of the population lived by means of subsistence agriculture, with more than 60 percent of total employment concentrated in the agricultural sector.

As we can see, the selected cases vary across many dimensions and lend themselves for the purpose of a qualitative comparative case study. One might object that there is danger of selecting cases in such way that they confirm the researcher’s preconceived notions, thereby shedding scientific doubt on the value of the study. Apart from the fact that this kind of selection bias can occur with other methods too, one can counter such criticism by stating that case studies have their own rigor. While the rigor may be of a different nature, it is no less strict than the rigor of quantitative methods.

In order to meet the standards of scientific rigor, this study analyzes the transition process in Bulgaria, Romania, Albania, and Bosnia according to the reform model de- scribed in Section 2.2. It remains to be said that although the model appears sensible in theory, in practice it is sometimes difficult to implement it verbatim. Therefore, the model should be understood as a flexible signpost rather than a rigid prescription.

2.5

Conclusion

The purpose of this chapter was to expose the theoretical and methodological foundation for the analysis of reform processes. The presentation of the reform model showed that by applying the market analogy to the political arena, the complexity of the reform process could be reduced so as to enable a systematic evaluation of the mechanisms at work. Three underlying problems of the reform process, i.e., state capacity, collective action, and agency, were subsequently discussed in more detail. The goal of the discussion regarding the potentials and limits of cross-country versus case studies was to show that combining both methods can yield fruitful results to aid in understanding the mechanisms of reform.

To what extent does the discussion help us to address the questions stated at the end of Chapter 1? Is it possible to identify political and institutional factors that trigger reforms and enable the poor to participate in the growth process? Furthermore, how can incentives for the non-poor be manipulated in order to achieve such a dynamic?

The argument proposed here is that the factors affecting the state’s ability to decide upon and adopt reform policies are: good governance and public sector management, the institutional framework for markets and physical and financial infrastructure, and

effective organization for the provision of basic services. State capacity, or the lack thereof, also influences the willingness of political actors to implement reforms. Good governance plays a critical role since it is the only factor that can change independently of the others. However, the recommendation of good governance does not include a ready-made recipe on how to create a good political and institutional environment. This is a logical conclusion as institutional functions do not translate into unique institutional forms. What is possible depends on local constraints and opportunities. Trial, error, and innovation are integral elements of this discovery process.

To participate in the growth process, the poor must solve the problems related to collective action and agency. It was shown that their chances of success increase if:

• their group is ‘small’ and has homogeneous preferences;

• their group is well-organized and able to control free riding among its members; • their group faces low opposition from other well-organized groups in the political

market;

• the political task is clear and easy to implement;

• the incentives of the principal and the agent are aligned;

• good monitoring technologies are available so that the agent’s actions and output can be easily observed;

• the agent’s short run payoff from deviation is low;

• the number of political actors is small so that the agency relationship remains simple;

• the principal can recourse to alternative or previously established performance standards.

Finally, it is hypothesized that competition in the political market seems the best known way to influence the incentives of the non-poor to initiate and sustain the growth process. In the next two chapters, this hypothesis is submitted to empirical testing. Chapter 3 models the dynamic relationship that exists among political reform, economic liberaliza- tion and economic performance in order to understand the causal transition mechanisms in post-communist countries. The model will shown that a median degree of political competition is required for successful democratic and economic transition. In Chapter 4, the reform processes in Bulgaria, Romania, Albania and Bosnia are described and subsequently analyzed according to the reform model proposed in Section 2.2.

The Process of Endogenous

Simultaneous Transition

3.1

Introduction

The primary argument of this chapter is that successful economic transition depends on the breadth of political competition within a given country. A sufficient level of political competition generates an endogenous, self-enforcing reform process that strengthens democratic institutions and stimulates economic growth.

Research suggests that the political outcomes that ensued after the collapse of post- communist regimes have determined the fortunes of these countries for a very long time. Countries that did not take the opportunity to establish free institutions at the onset of the transition phase subsequently may not be able to reform their political and economic institutions. In contrast, countries that established political competition in the early 1990s have experienced quick economic liberalization and democratic consolidation. In a third group of countries, however, transition has followed a more complex path. The transition process in these countries includes stagnation or authoritarian reversals, which sometimes are overcome, but also may endanger the democratization process.

Conventional empirical analyses do not account explicitly for the transition mech- anism, which leads to the aforementioned divergent transition paths. This is because existing empirical models only focus on one of the following relevant aspects of simul- taneous transitions. They examine the determinants of political competition, economic liberalization or economic performance independently of one another. These separate analyses do not study how political and economic institutions jointly evolve, or whether they reinforce or constrain each other over time. They ignore feedback from one part of the political economy to the other, which is important to understand how transition failures, political stagnation and reversals, or democratic consolidation emerge endoge- nously.

We present an empirical model that combines the research on economic reform, de- mocratization and economic performance in post-communist transition countries. In this structural model, changes in one part of the political economy can have repercussions

throughout the system. For instance, political reforms may induce economic liberaliza- tion, which then has a positive influence on political competition in subsequent periods. Similarly, a lower degree of political competition can lead to a lower degree of economic liberalization, which may in turn have a negative effect on economic growth. The model is used for a sequence of simulations that show how different constellations in the political and economic arena lead to distinct long-term political and economic trajectories.

The simulation results reflect the diverging transition paths of many post-communist countries since the early 1990s. Contrary to static empirical analyses, they also isolate explicitly the mechanism that leads to self-enforcing (consolidated) democratic institu- tions (Weingast, 2008). The results show that the initial level of political competition is crucial for transition dynamics in the long run. In countries with a sufficient degree of political competition, citizens respond to economic crises by demanding more economic liberalization. The findings also reveal a strong complementary relationship between political and economic reforms. Economic liberalization encourages political liberaliza- tion and activates a dynamic, self-enforcing reform cycle. The cycle continues until fully liberalized economic and consolidated democratic institutions are established.

In the absence of political competition, citizens are constrained in their ability to lobby for economic liberalization as they face costly and sometimes prohibitive barriers to political participation. Thus when confronted with an economic downturn, governments face less pressure to initiate economic reforms. The lack of government responsiveness disrupts the transmission mechanism between economic and political liberalization, and a dynamic, self-enforcing reform cycle fails to emerge.

Unlike in previous empirical studies, political stagnation and reversals follow endoge- nously from the dynamic relationship between political and economic reforms. Promising initial reforms may be reversed if economic and political competition diverge from their common, long-term time path. Specifically, delays in economic reforms can halt progress in political liberalization. If, for instance, a government only lifts political restrictions, but does not simultaneously increase economic competition, the country will experience political setbacks before it embarks on a transition path towards a democracy with a market economy. This result provides an explanation for the occurrence of political instability and slow democratic progress in some transition countries.

Our study yields implications about the long-term consequences of the ‘colored revo- lutions’, i.e., the waves of public protest during the last decade in some post-communist countries. Greater political competition, which arose after public protest provoked the resignation of the authoritarian governments, may activate the self-enforcing endoge- nous reform mechanism, but democratic consolidation in these countries can only occur if economic competition is established as well. As described in the previous paragraph, a lack of economic liberalization is likely to impede democratization at least temporar- ily. Political stagnation or reversals can occur until economic liberalization strengthens democratic forces since fortified democratic forces have the power to overcome the re- sistance from reactionary groups. If this is the case, the protests are not necessarily a ‘one-shot deal’ (Tucker, 2007b). They may have lasting effects, although the develop- ments that have followed protests suggest otherwise.